The Henderson Smaller Companies Investment Trust plc. Report and Financial Statements for the year ended 31 May 2013

Transcription

1 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements for the year ended 31 May 2013

2 Organised by In association with The Henderson Smaller Companies Investment Trust plc Objective Investment selection Benchmark Index Manager Independent Board Website The objective of The Henderson Smaller Companies Investment Trust plc is to maximise shareholders total returns by investing mainly in smaller companies that are quoted in the United Kingdom. The investment selection process seeks, by rigorous research, to identify high-quality smaller companies with strong growth potential. Generally new investments are made in constituents of the benchmark index. Investments may continue to be held when the underlying companies grow out of the smaller companies sector but strong selling disciplines are applied regardless of the size of the entity. Numis Smaller Companies Index (excluding investment companies).* The Board has appointed Henderson Global Investors to manage the investments and to provide the related administrative services. The directors, who are independent of the Manager, meet regularly to consider investment strategy and to monitor the performance of the Company. Information about the Company can be found on the website *until 28 March 2012, known as the Hoare Govett Smaller Companies Index (excluding investment companies). Prior to 1 June 2003 the benchmark was the FTSE SmallCap Index (excluding investment companies) 2013 Investor of the Year WINNER Neil Hermon Henderson Smaller Companies Award Sponsor

3 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements Highlights Financial of Highlights the Year 31 May 31 May Total net assets 403 million 280 million Net asset value per ordinary share 540.0p 374.5p Net asset value per ordinary share on an alternative basis* 535.0p 367.9p Market price per ordinary share 454.0p 284.3p Total return/(loss) per ordinary share 171.0p (19.6)p Revenue return per ordinary share 6.2p 6.1p Dividend per ordinary share 6.5p 5.5p Gearing 8.2% 8.7% *Calculated by deducting from the net assets the debt at its market value, as disclosed in note 20 on page 53. Defined here as the total market value of the Company s investments less shareholders funds as a percentage of shareholders funds. Performance: comparative total return figures for periods ended 31 May year 2 years 3 years 5 years 10 years % % % % % The Henderson Smaller Companies Investment Trust plc: net asset value per share * (1) (1) (1) (2) (2) The Henderson Smaller Companies Investment Trust plc: share price (2) Numis Smaller Companies Index (excluding investment companies) (3)# FTSE SmallCap Index (excluding investment companies) (3) FTSE All-Share Index (3) Sources: (1) Henderson Global Investors (2) Morningstar (3) Datastream; The net asset value total return figures are calculated on the basis that the Company s issue of Debenture Stock is included at its par value, as in the financial statements that follow. *The net asset value per share total return figures include an adjustment to reflect that since 2005 investments are valued at bid prices (i.e. at fair value) rather than at mid-market prices. # Previously the Hoare Govett Smaller Companies Index (excluding investment companies). Historical Record Revenue Special Performance Market price Net asset value earnings Final dividend dividend per ordinary per ordinary per ordinary per ordinary per ordinary Year end share in pence share in pence* share in pence* share in pence share in pence 31 May May May May May May May May May May May *The figures for 2006 (and the figures for subsequent years) have been calculated in accordance with International Financial Reporting Standards ( IFRS ); 2005 figures were restated on first adoption of IFRS. The figures for the earlier years have not been restated. In 2008 and 2009 the revenue earnings included the write-back of VAT borne on management fees in certain periods between 1990 and 2007 and the simple interest receivable on those refunds. Most of the amounts recognised were distributed by way of special dividends.

4 2 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements 2013 Contents About the Company Inside front cover Profile 1 Financial Highlights, Performance and Historical Record 2 Contents 2 Warning to Shareholders Management Report 3 Chairman s Statement Management Report: Investment Review 4-8 Fund Manager s Review 9-11 Investment Portfolio Management Report: Directors Report 12 Directors 12 Management Directors Report Directors Remuneration Report 28 Statement of Directors Responsibilities Independent Auditors Report Independent Auditors Report Financial Statements 31 Statement of Comprehensive Income 32 Statement of Changes in Equity 33 Balance Sheet 34 Cash Flow Statement Notes to the Financial Statements Shareholder Information 55 General Shareholder Information 56 Directors and other Information Warning to Shareholders Many companies have become aware that their shareholders have received unsolicited phone calls or correspondence concerning investment matters. These are typically from overseas based brokers who target UK shareholders offering to sell them what often turn out to be worthless or high risk shares in US or UK investments. They can be very persistent and extremely persuasive. Shareholders are therefore advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free company reports. Please note that it is very unlikely that either the Company or the Company s Registrar, Computershare Investor Services PLC, would make unsolicited telephone calls to shareholders and that any such calls would relate only to official documentation already circulated to shareholders and never in respect of investment advice. If you are in any doubt about the veracity of an unsolicited phone call, please call either the Company Secretary or the Registrar at the numbers provided on page 56.

5 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements Chairman s Statement This year has been excellent for the Company and I am delighted to report that the net asset value (NAV) of the Company increased by 46.1% in the year on a total return basis and thus again outperformed its benchmark, the Numis Smaller Companies Index, by 6.8%. I would like to thank all the Henderson staff and my Board for their efforts throughout the year on behalf of shareholders but in particular pay tribute to Neil Hermon. Last November marked his tenth anniversary as Fund Manager and I should like to repeat the thanks stated in my last interim statement and to congratulate him on his great success. Over the past ten years our net asset value total return has been 382.8% versus a total return from the Numis Smaller Companies Index (excluding investment companies) of 280.6%, the FTSE All-Share Index of 149.6% and the FTSE SmallCap Index of 117.7%. This is a compound annual return to shareholders of 17.1% and demonstrates that a long-term approach is the appropriate one to take when investing in smaller companies. It is also testimony to his great skill in picking undervalued stocks. I am pleased to report that the Company s performance over the past year has been recognised with a number of awards. The Company won Best UK Smaller Companies Trust and Best UK Equity Trust for Savers and was highly recommended in the Best Large Trust category by Money Observer. The Company also won the award for Best UK Investment Trust by What Investment and Best UK Equity Growth Fund at the Investors Chronicle Fund awards. Furthermore, Neil was voted Investor of the Year at the Quoted Company Awards. Revenue and dividend The revenue return per share has remained relatively flat at 6.2p, compared with 6.1p for the previous year. However, we propose an increase in the final dividend for the year to 6.5p per share (2012: 5.5p). This is of course subject to shareholder approval at the Annual General Meeting in October. If approved this would be a 12-fold increase over these past 10 years, and a compounded annual growth rate of 29.2%. Since the year end, the Board has agreed a revision to the accounting policy and, with effect from 1 June 2013, all investment management fees and finance costs will be allocated 70% to the capital account and 30% to the revenue account, based on the Board s expected long-term split of total returns. Any performance fees will continue to be charged wholly to capital. This change in policy will enhance the Company s dividend-paying capability in future years. Discount and Share buy-backs During the year the smaller companies sector as a whole traded at an average discount of 14.1%, with highs and lows of 17.6% and 11.4% respectively. At the year end, the Company s shares traded at a discount of 15.9%. The Company s discount ranged from 12.8% to 23.6% with the average discount over the year being 18.3%. This offered a compelling investment opportunity and therefore we bought back 40,000 shares at an average discount of 22.1% and average price of p. This year we appointed Numis as the Company s new broker. An expressed remit of the appointment was to widen and diversify the shareholder base, which we believe could help narrow the discount; however, we accept that this will take time. The Board continues to keep a close eye on the discount and will from time to time buy back shares, even though we do not believe that share buy-backs have a significant effect on the discount other than in the short term. Jamie Cayzer-Colvin Continuation Our shareholders are asked every three years to vote for the continuation of the Company and a resolution to this effect will be put to the Annual General Meeting in October. Henderson Smaller Companies Investment Trust PLC has shown again that active investment management, well-executed within the transparent structure of an investment trust company, is a highly effective means of getting exposure to this class of equity. We are therefore recommending shareholders to vote for the Company to continue. Regulatory The Board has noted that the Alternative Investment Fund Managers Directive was written into UK legislation with effect from 22 July There is a one-year transition period within which the Company must comply with the provisions of the directive, which includes the appointment of an Alternative Investment Fund Manager ( AIFM ) and an independent Depositary, who will provide an independent monitoring role to ensure the Company complies with the regulations. The Board has agreed in principle that Henderson will be appointed as the AIFM and has instructed them to take the necessary actions to ensure that all documentation and processes to enable the Company to comply with the regulations are in place within the transition period. A decision regarding the appointment of the Depositary will be taken in due course. Outlook The year under review has been an excellent one for equity markets and for the Company, which will be hard to repeat this year. Admittedly good news continues to flow from the corporate world, with corporate balance sheets strong, and earnings look set to see reasonable growth in the coming year. Governments, however, are still beset with seismic economic issues and political leadership is weak, which can only lead to market volatility as investors react and overreact to the news. Despite these problems, I believe the smaller companies market will Continue to produce exciting growth opportunities, so with the company s sound and disciplined approach of value investing, we can look forward to the coming year with confidence. Annual General Meeting Our Annual General Meeting will be held at 10:30am on Friday, 4 October 2013 at the Registered Office, 201 Bishopsgate, London EC2M 3AE. The Notice of Meeting is set out in the accompanying circular to shareholders. We would encourage as many shareholders as possible to attend for the opportunity to meet the Board and to watch a presentation from Neil Hermon reviewing the year and looking forward to the year ahead. Board composition James Nelson will be retiring from the Board at the AGM in October. I would like to take this opportunity to thank James, on behalf of the Board and shareholders, for his service to the Company over the past eleven years. I would also like to take this opportunity to welcome David Lamb to the Board, who was appointed on 1 August J M B Cayzer-Colvin Chairman 29 August 2013

6 4 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements 2013 Fund Manager s Review Neil Hermon 31 May 31 May Analysis of the portfolio by sector % % Support Services Electronic & Electrical Equipment Media Real Estate Travel & Leisure Financial Services Household Goods & Home Construction Software & Computer Services Chemicals Oil & Gas Producers Construction & Materials Aerospace & Defence General Retailers Industrial Engineering Technology Hardware & Equipment Health Care Equipment & Services Oil Equipment, Services & Distribution Pharmaceuticals & Biotechnology Personal Goods 0.7 Mobile Telecommunications 0.4 Mining Food Producers Industrial Metals & Mining 0.6 General Industrials Market year in review The year under review was an excellent one for equity markets. The FTSE All-Share Index rose in every month of the year. This positive performance was due to the actions of the European Central Bank to resolve the Eurozone crisis, loose monetary policies from developed world Central Banks, a marginally improving global macro-economic situation and the relative attractiveness of equities over other asset classes. Additionally the fundamentals of the corporate sector to improve. Companies further increased their profits enabling dividends to grow. Balance sheets remained strong. Mergers and acquisition activity, however, remained subdued as management teams were unwilling to take on financial leverage in the face of economic uncertainty. Smaller companies materially outperformed larger companies over the year. The Numis Smaller Companies Index (excluding investment companies) has now outperformed the FTSE All- Share Index for the last five years consecutively (and in twelve of the last thirteen years). Fund performance The Company had a very strong year in performance terms outperforming its benchmark and rising substantially in absolute terms. The net asset value rose 46.1%, on a total return basis. This compares to a rise of 39.3% (total return) from the Numis Smaller Companies Index (excluding investment companies) and 46.1% (total return) from the FTSE Small Cap Index (excluding investment companies). The outperformance came from a combination of underlying positive portfolio performance and a positive contribution from gearing in the Company, which can be seen in the attribution analysis on page 16. The year under review is the ninth year of outperformance of our benchmark, the Numis Smaller Companies Index (excluding investment companies), in the last ten years. Gearing Gearing started the year at 8.7% and ended it at 8.2%. The majority of the gearing is provided by the 20 million 10.5% 2016 Debenture with the remainder by short term bank borrowings. Gearing was a positive contributor to performance in

7 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements Fund Manager s Review the year as markets rose and has been a significant positive over the 10 years I have managed the investment portfolio. Attribution analysis The tables below show the top five contributors to, and the bottom five detractors from, the Company s relative performance. 12 month Relative return contribution Principal contributors % % WSP Taylor Wimpey Ashtead Bellway New Britain Palm Oil* *Included in the benchmark index but not owned by the Company. WSP is an international engineering consultant, principally in the built environment. WSP was a long standing investment in our portfolio but had struggled in recent years as investors were frustrated by the lack of profit progress, the uncertain outlook for growth and the cut-backs in UK Government spending. We to hold the company as we felt that although trading conditions were tough, recovery potential was significant and there was a high chance of the company being acquired in a consolidating global industry. This patience paid off as WSP was acquired for a near 70% premium by the Canadian company, Genivar, in July Taylor Wimpey is a national UK housebuilder. From the depths of the housing downturn in 2007/08 Taylor Wimpey has made an impressive recovery. It has strengthened it s over leveraged balance sheet through the sale of the company s US operation and by raising money through a rights issue. Financial returns have been improving through the acquisition of higher margin land and cost reductions in the building process. The share price performance in the last year has been further helped by strong growth in profitability and a market re-rating of the housebuilding sector. Recent Government initiatives are helping to further boost prospects for the UK housing market and transaction levels and prices are set to rise further. Ashtead is a plant hire company with operations in the UK and US. The key driver for the company, however, is its US operations which account for over 95% of its profitability. Plant hire is a notoriously cyclical industry and Ashtead suffered badly in the downturn of the US construction markets post the credit crunch. Since then Ashtead has made an impressive recovery aided by a structural shift in the US market from construction companies renting their plant fleet rather than owning it. Additionally Ashtead has taken market share from smaller competitors who have struggled to raise bank finance to invest in their hire fleet. These trends have meant profitability has expanded rapidly. With US construction markets showing signs of recovery the outlook for Ashtead remains strong. Bellway is also a national UK housebuilder. Much of the commentary on Taylor Wimpey applies equally to Bellway. Bellway went into the downturn with a much stronger balance sheet than Taylor Wimpey and therefore its share price downturn and subsequent recovery has been less dramatic. Nevertheless the last year has been an excellent one for Bellway and with a strong landbank, an ungeared balance sheet and strong management team the prospects for the company are bright. New Britain Palm Oil is a producer of palm oil. The shares have been poor performers in the year as production difficulties and a weak palm oil price have impacted profitability. The Company has no holding in New Britain Palm Oil. 12 month Relative return contribution Principal detractors % % e2v Technologies Rockhopper Exploration Dixons Retail* Barratt Developments* Melrose Industries *Included in the benchmark index but not owned by the Company. e2v Technologies manufactures high technology electronic components. After enjoying a strong recovery from the last recession the company has had a tough last 12 months. Profitability has not been as strong as expected due to weakness in industrial end markets, a downturn in US defence spending, a delay in a project with the mining giant Rio Tinto and delivery issues with a number of its space projects. Although e2v is a company with significant technology and high margins it has struggled to deliver consistent growth. This has led to a below market valuation for the business. There is significant pressure building on the management team to find a solution to this problem and the recent appointment of a new chairman will hopefully accelerate this process. Rockhopper Exploration is an oil and gas exploration company focusing on the Atlantic Basin to the north of the

8 6 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements 2013 Fund Manager s Review Falkland Islands. The company made a major discovery in 2010 and its share price rose substantially. Last year it successfully farmed down its position in the Sea Lion discovery to Premier Oil, thereby reducing its commitment and cost in developing the field. However, given the long term nature of oil development, with first production not till 2017, the lack of exploration activity and negative market sentiment towards junior oil and gas companies have meant the share price has performed poorly. Going into 2014 exploration activity is likely to re-commence which should re-ignite interest in the company. Dixons Retail is an electrical retailer. The market in which it operates is fiercely competitive. New competitors, like Amazon, and other internet retailers have driven prices and margins down over the last few years. In the last year Dixons has benefited from capacity withdrawal from the market as the likes of Comet and Best Buy have exited the UK. The Company has no holding in Dixons Retail. Barratt Developments is a national UK housebuilder. Like Taylor Wimpey and Bellway the company has benefited from a recovery in the UK housing market over the last year. The Company has no holding in Barratt Developments. Melrose Industries is a diversified engineering group. Its raison d etre is to acquire under-performing companies and then turn round their performance through the application of strict financial controls, better management practices and investment in growth areas leading to significant expansion in margins and cash generation. When this has been achieved and significant value created Melrose will sell the business on to a trade or private equity buyer. This has been done to great effect with the acquisitions of Dynacast, McKechnie, FKI and more recently Elster. After a very strong 2011/12 Melrose had a relatively weaker 2012/13 due to profit taking, indigestion around the rights issue to fund the acquisition of Elster and some weakness in its power generation end markets. Portfolio activity Trading activity in the portfolio was consistent with an average holding period of five years. Our approach is to consider our investments as long term in nature and to avoid unnecessary turnover. The focus has been on adding stocks to the portfolio that have good growth prospects, sound financial characteristics and strong management, at a valuation level that does not reflect these strengths. Likewise we have been employing strong sell discipline to cut out stocks that fail to meet these criteria. In the year we have added a number of new positions to our portfolio. We increased our exposure to the travel and leisure sector. In the past few years we had a very under-weight position in this area as we were concerned by the pressure on UK consumers net disposable income and the effect this would have on consumer spending. This strategy has added significant relative value. However as the UK economy has started to show signs of improvement we felt it would be appropriate to add to our weighting. Acquisitions included Cineworld, a leading operator of cinemas, and Thomas Cook, the leading tour operator business. Other new additions to our portfolio included: Dechra is an international veterinary pharmaceutical business. Dechra has a very strong track record over the last ten years driven by a combination of acquisition and organic growth. The company has diversified internationally from UK origins to now having a strong presence in Europe and US whilst reducing its exposure to the low margin distribution business. The future looks bright with prospects boosted by a growing market and a range of new drugs expected to be launched over the coming years. Hays is a leading international recruitment consultant. Recruitment is an activity which is closely linked to economic growth. With conditions in the global economy showing signs of improvement Hays is well placed to benefit. Additionally its German operations are benefiting from structural growth in temporary employment whilst the UK business has significant recovery potential from a cyclically depressed level. Sherborne Investors is an investment vehicle fronted by Edward Bramson. He has built a reputation for taking a stake in an under-performing business, gaining management control and turning around its fortunes. In the UK he has had great success at 4Imprint, Elementis, Spirent and more recently F&C Asset Management. We backed his money making skills by investing in Sherborne B which has subsequently bought a stake in 3i, the private equity, infrastructure and debt management group. Xaar is a digital ink jet printing business. The company supplies print heads and ink to industrial users who use these products for printing on glass, cardboard, ceramics, metals, paper and textiles. Xaar has had a phenomenal year, more than doubling its profits, on the back of rapid take-up in the ceramic market where its technology has revolutionised the market. This growth is likely to continue as to remain competitive ceramic tile

9 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements Fund Manager s Review manufacturers need to adopt Xaar print head technology. Longer term there is a good chance that other industries could follow the ceramics market. We invested in three IPOs (initial public offerings) in the year. These were Clinigen, a fast growing provider of services to the pharmaceutical industry, Countrywide, a leading UK estate agency business that is poised to benefit significantly from the improvement in housing transactions, and HellermannTyton, a global manufacturer of cable management solutions. To balance the additions to our portfolio we have disposed of positions in companies which we felt were set for poor price performance. We disposed of our holding in Goals Soccer Centres, the 5-a-side football operator, where a slowing roll-out of new centres and high debt mean profit progress is likely to be anaemic. We also disposed of our holding in London Mining, the West African iron ore miner, where the Marampa project has been beset by operational issues and a weak ironore price. Additionally we sold our small positions in Metminco, Avocet Mining and Bullabulling as we believe the prospects for junior miners is poor with weak commodity prices and a lack of finance for new projects. A notable feature in the year was the sale of a number of investments where the company had been elevated into the FTSE 100 Index. These investments have proved to be very successful since acquisition and our job is to find alternative opportunities which will replicate their success. Disposals in this category include Aberdeen Asset Management, the fund manager, Babcock, the support services group, Croda, the speciality chemicals company, Melrose, the diversified engineering group, and Wood Group, the oil services company. We benefited from a level of takeover activity in the year. The level was down on the previous year as the macro-economic uncertainty meant corporates were unwilling to be overly aggressive in leveraging their balance sheets to acquire competitors. Within our portfolio, takeover bids were received for WSP, an international engineering consultancy, from Genivar, and Nautical Petroleum, a North Sea oil and gas explorer, from Cairn Energy. Portfolio outlook The following table shows the Company s key stock positions versus the Numis Smaller Companies Index (excluding investment companies) at the end of May Top ten active positions Holding Index Weight Active Weight at 31 May 2013 % % % Taylor Wimpey Informa Spectris Ashtead Oxford Instruments e2v Technologies Rotork Bellway Interserve Paragon Brief descriptions of Taylor Wimpey, Ashtead, Bellway and e2v Technologies have been included earlier. A brief description of the remaining largest active positions follows: Informa is a leading business to business information group. Its activities include the provision of academic journals, books, data services, trade exhibitions, conferences and training services. The company produced a very resilient profit performance during the downturn, helped by aggressive cost cutting. Additionally the balance sheet has been strengthened and the company is set for a return to growth in coming years. Given its low valuation, we believe the share price is set for further gains. Spectris manufactures, designs and markets products for the electronic control and process instrumentation sectors. The company has a number of subsidiaries which tend to be market leaders in global market niches. Cash generation is very sound, the management team is well respected and the balance sheet is strong. Profit growth in recent years has been strong and although end markets in the short term have softened, longer term the company is well set for growth. Oxford Instruments produces advanced instrumentation equipment for industrial and scientific research markets. The company has benefited from strong demand for its products, especially in the nanotechnology area which is an emerging area of research and is set to grow strongly in future years. The company has been substantially re-structured by its management team over recent years and is seeing strong

10 8 The Henderson Smaller Companies Investment Trust plc Report and & Accounts Financial 2009 Statements 2013 Fund Manager s Review growth in margins and profitability. Although in the coming year there are headwinds around the completion of profitable contracts and some weakness in industrial end markets, longer term the business is well positioned for superior growth. Rotork designs and manufactures actuators and related products for use in the valve industry. Its products are principally used in the oil and gas, power and water industries. It is a global leader in its industry and has consistently grown market share through high levels of quality and investment in new product development. The company has a fantastic long term track record and has consistently grown faster than its peer group. Margins are high, the balance sheet is strong, sales exposure is geared towards growing industries and emerging economies and management are high quality. Although the shares are on a reasonably high valuation Rotork has and will continue to be a fantastic long term investment. Interserve is an international construction and support services group operating principally in the UK and Middle East. The principal driver of the business is currently the UK support services operation where margins are rising from depressed levels. Additionally the UK construction activities are proving resilient in the face of tough market conditions and the Middle East is benefiting from economic growth. Interserve have strengthened their balance sheet in the last year by selling a large proportion of their PFI assets which has enabled the company to reduce its pension deficit and give the company substantial firepower for acquisitions. Paragon is a provider of buy to let mortgages and consumer finance. The business environment for Paragon has noticeably improved in the last year. Funding markets have opened up and allowed Paragon to resume lending. The quality of the existing loan book remains very high with impairments at low levels. Paragon is also benefiting by buying, at attractive prices, parcels of loans from banks which need to de-gear their balance sheets. With the UK housing market strengthening the outlook for Paragon looks strong. Market outlook The year under review has been a very positive one for equity markets despite an uncertain global economic backdrop. These uncertain conditions remain in place with a slowing Chinese economy, most European economies in recession and the US still suffering the effects of sequestration. However at the margin conditions are arguably improving particularly in the US where a rise in the housing market is boosting consumer confidence. The UK economy has shown at best minimal growth. The need to rein in public spending and reduce the public sector deficit has forced large cuts in government spending. This, combined with weak economies of our major trading partners in Europe, has dampened economic recovery. In this environment, with high unemployment, low wage growth and a rising cost of living, the resilience of the UK consumer is being tested and is making conditions for domestically focused businesses challenging. However, like the US, economic conditions are showing recent signs of improvement with the UK housing market starting to see a recovery in prices and transaction levels. Another factor that the equity market will have to deal with in the coming year is the potential end or tapering of quantitative easing. This drug of easy money is something the market has become reliant on over the last few years and it is unclear how it will react to its withdrawal. However, it is unlikely that this will happen until it is clear economic conditions are getting materially better. Even after the rise in the last year, stock market valuations are still below historic standards and compare well to other asset classes. Corporate profitability has proved robust and earnings look set to see reasonable growth in the coming year. Mergers and acquisition activity however is currently subdued as management teams are unwilling to take on financial leverage in the face of economic uncertainty. An increase in M&A would be helpful for smaller companies in particular as mergers and acquisition activity tends to be focused in this area. In conclusion, the year under review has been an excellent one for the equity market and the Company. Relative performance was strong and our portfolio companies have, overall, performed robustly. Our investments are generally trading well, are soundly financed and attractively valued. Additionally, the small company market continues to throw up exciting growth opportunities in which the Company can invest. Neil Hermon Fund Manager 29 August 2013

11 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements Investment Portfolio at 31 May 2013 Valuation as at 31 May 2013 % of Company Main activity 000 portfolio Taylor Wimpey house building 12, Bellway house building 11, Informa business to business information 11, Spectris electronic control and process instrumentation 11, Oxford Instruments advanced instrumentation equipment 11, Ashtead plant hire 10, Intermediate Capital mezzanine finance 10, Victrex speciality chemicals 9, Senior aerospace and automotive products 9, Paragon buy to let mortgage provider 9, largest 109, Interserve international contractor 8, e2v Technologies electronic components 8, WS Atkins engineering consultancy 8, Restaurant Group restaurants 7, Rotork process control solutions 7, Domino Printing Sciences industrial printing equipment 7, Howden Joinery kitchen manufacturer and retailer 7, Grainger residential property investor 6, LSL Property Services retail property investor 6, Playtech internet gaming software 6, largest 185, AZ Electronic Materials speciality chemicals 6, Filtrona speciality plastic and fibre producer 6, Northgate commercial vehicle hire 5, Anite telecom software 5, Thomas Cook tour operator 5, Renishaw precision measuring and calibration equipment 5, Premier Oil oil and gas exploration and production 5, Perform online media information 5, John Menzies news distributor and aviation services 5, Fidessa financial software 5, largest 243, Carphone Warehouse mobile telephone retailer 5, *Tyman construction and materials 5, Dunelm homewares retailer 5, Aveva Group design software 4, Greene King pub operator 4, Euromoney Institutional Investor business to business information 4, Jupiter Fund Management investment management company 4, Hunting oil equipment and services 4, Fenner industrial engineering 4, Hays business training and employment agencies 4, largest 290,

12 10 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements 2013 Investment Portfolio at 31 May 2013 Valuation as at 31 May 2013 % of Company Main activity 000 portfolio *RWS patent translation services 4, SIG builders merchant 4, ITE Group exhibition organiser 4, Ultra Electronic Holdings specialist defence contractor 4, CSR semi conductors 4, Capital Regional retail property investor 4, Hellermann Tyton electrical components and equipment 3, Shaftesbury property investor 3, Synergy Healthcare healthcare support services 3, Afren oil and gas production and exploration 3, largest 330, Balfour Beatty international contractor 3, Countrywide real estate services 3, Keller ground engineering 3, Kentz oil and gas contractor 3, Tribal Group education support services and software 3, Laird electronic products 3, Ted Baker clothing retailer 3, St Modwen Properties real estate holding and investment 3, NCC IT security 3, Chime Communications media agencies 3, largest 364, NMC Health healthcare provider 3, F & C Asset Management investment management company 2, Cineworld recreational services 2, *Clinigen pharmaceutical services 2, RPS Group business support services 2, Ophir Energy oil and gas explorer 2, Spirent Communications telecoms testing 2, Speedy Hire tool hire 2, Dechra Pharmaceuticals veterinary pharmaceuticals 2, Hyder Consulting engineering consultancy 2, largest 391, Costain contractor 2, Spirit Pub pub operator 2, Kofax electronic capture software 2, Unite Group student accommodation investor 2, Consort Medical healthcare products 2, *WYG engineering consultancy 1, *Majestic Wines wine retailer 1, Premier Farnell industrial suppliers 1, Rathbone Brothers private client asset management 1, *LXB Retail Properties retail property investor 1, largest 413,

13 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements Investment Portfolio at 31 May 2013 Valuation as at 31 May 2013 % of Company Main activity 000 portfolio *Sherborne Investors investment company 1, *Monitise mobile banking software 1, *Abcam internet retailer of antibodies 1, Xaar digital print technology 1, *Digital Barriers digital security 1, Heritage Oil oil and gas exploration and production 1, Mears business support services 1, Elementis speciality chemicals 1, Kenmare Resources titanium dioxide mining 1, *IQE semiconductor manufacturer 1, largest 427, Moneysupermarket price comparison website 1, *Faroe Petroleum oil and gas exploration and production 1, RM education software Tarsus Group exhibition organiser Brammer industrial suppliers *Rockhopper Exploration oil and gas exploration *Next Fifteen Communications PR and media services *Providence Resources oil and gas exploration *Asian Plantations palm oil plantations *Enteq Upstream oil equipment and services largest investments 436, Total investments 436, There were no convertible or fixed interest securities at 31 May *quoted on the Alternative Investment Market.

14 12 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements 2013 Directors Jamie Cayzer-Colvin James Nelson Keith Percy David Lamb Mary Ann Sieghart Beatrice Hollond J M B Cayzer-Colvin (Chairman), Jamie joined the Board in May 2011 and was appointed as Chairman on 30 September He is an executive director of Caledonia Investments plc and among other appointments, he is a director of Polar Capital Holdings plc and the India Capital Growth Fund Limited plus a number of unquoted companies and charities. J J Nelson, James joined the Board in He is the Company s Senior Independent Director. He was formerly an executive partner of Graphite Capital, a director of Intermediate Capital Group PLC and is a former chairman of the BVCA. He is a director of Aurora Investment Trust plc and Syncora Guarantee (UK) Limited. K E Percy, Keith joined the Board in He is chairman of Brunner Investment Trust plc and a director of JPMorgan Japanese Investment Trust plc, Standard Life Equity Income Trust plc and F&C Asset Management plc. D Lamb, David was appointed to the Board on 1 August He is Managing Director of St James s Place plc. He is a member of the Investment Committee and a Trustee of the St. James s Place Foundation. David is also a Director of the Association of Private Client Investment managers and Stockbrokers and a member of the Council for the CBI (South West). M A Sieghart, Mary Ann joined the Board in July She was assistant editor of The Times from 1998 to She is also a former city editor and Lex columnist. She chairs the Social Market Foundation, sits on the council of Tate Modern and the advisory council of Into University and is a trustee of the Radcliffe Trust and a non-executive director of DLN Digital Limited. She writes occasional columns for The Independent and presents programmes on Radio 4. B Hollond, Beatrice joined the Board in July 2010 and became Chairman of the Audit Committee on 24 September She is deputy chairman of Millbank Financial Services Limited, an independent family office, and chairman of Millbank Investment Management Limited, its investment management subsidiary. She is chairman of Keystone Investment Trust plc and a director of ORA Capital Partners Limited and Oldfield & Co. (London) Limited. Among other appointments she is a trustee of the Esmée Fairbairn Foundation, chairman of the Institute for Philanthropy and chairman of the Investment Committee, and an advisory fellow of Pembroke College, Oxford. All the directors are independent and all are members of the Management Engagement Committee and the Nomination Committee. Mr Cayzer-Colvin chairs these two committees. B Hollond chairs the Audit Committee, the other members of which are J J Nelson, K E Percy, M A Sieghart and D Lamb. Management Neil Hermon Neil Hermon joined Henderson Global Investors in November 2002 as head of its UK smaller companies team. A chartered accountant, he was formerly head of smaller companies at Morley, the fund management arm of Aviva. Henderson Secretarial Services Limited, acts as the corporate company secretary.

15 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements Directors Report The directors present the audited financial statements of the Company and the report for the year ended 31 May The directors believe that this Annual Report and Financial Statements presents a balanced and understandable assessment of the Company s position and the prospects. Business Review The business review seeks primarily to provide information about the Company s business, its principal risks and uncertainties and its results for the year ended 31 May It should be read in conjunction with the Chairman s Statement on page 3 and the Fund Manager s Review on pages 4 to 8, which reviews the investment activity in the year and the outlook for the portfolio. a) Status The Company is incorporated in England and Wales under registration number 25526, and domiciled in the United Kingdom. The Company traded throughout the year and was not dormant. It is an investment company as defined in section 833 of the Companies Act 2006 and operates as an investment trust in accordance with section 1158 of the Corporation Tax Act 2010 ( Section 1158 ). The Company is subject to the UK Listing Authority s Listing Rules and is governed by its articles of association, amendments to which must be approved by shareholders by way of a special resolution. The Company is not a close company. The Company was required to seek approval from HM Revenue & Customs ( HMRC ) of its status as an investment trust under Section 1158 every year up to and including the year ended 31 May 2012 and such approval was granted. From 1 June 2012 approval is by way of a one-off application for investment trust status, for which approval has been granted. The Directors are of the opinion that the Company will continue to conduct its affairs in a manner that will enable it to continue to hold such approval. Approval as an investment trust allows the Company to analyse its income between revenue, which is available for distribution by way of dividends, and capital, which it is prohibited from distributing other than by way of share buy-backs by its articles of association. The Company is liable to corporation tax on its net revenue profits but is exempt from corporation tax on capital gains if it has complied at all times with Section The Company intends to continue to manage its affairs so that its investments fully qualify for the stocks and shares component of an ISA. b) Investment objective The Company s investment objective is to maximise shareholders total returns by investing mainly in smaller companies that are quoted in the United Kingdom. The strategy is to use rigorous research to identify high-quality smaller companies with strong growth potential. The benchmark is the Numis Smaller Companies Index (excluding investment companies) (previously called the Hoare Govett Smaller Companies Index). Generally, new investments are made in constituents of the benchmark index but they may continue to be held when the underlying companies grow out of the smaller companies sector. Once a portfolio company enters the FTSE 100 Index the Fund Manager has, in normal circumstances, six months to sell the position. c) Investment policy The Company s portfolio is managed within a framework of investment limits and restrictions determined by the Board, the primary purpose of which is to spread and mitigate investment risk. Diversification The Company maintains a diversified portfolio, which is detailed on page 4 and pages 9 to 11. The portfolio is actively managed by the Manager (Henderson Global Investors Limited), which provides regular reports on investment activity and portfolio construction to the directors at and between Board meetings. The Company will not invest more than 5% of its total gross assets, calculated as at the time of investment (or additional investment), in any one holding. The Company will not make any investment that, calculated at the time of investment (or additional investment), would result in it holding more than 10% of an investee company s equity. The Board may give approval to the Manager to exceed these limits to as far as 10% and 20% respectively but only in exceptional circumstances. Asset Allocation Generally, the Company will invest in smaller companies that are quoted in the United Kingdom. Investments may include shares, securities and related financial instruments, including derivatives. Gearing The Company will borrow money for investment purposes if the Board considers it appropriate. Net borrowings are limited to a maximum of 30% of the value of shareholders funds. General In accordance with the Listing Rules of the UK Listing Authority, the Company will not invest more than 15% of its

16 14 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements 2013 Directors Report gross assets in the shares of other listed closed-ended investment funds, including investment trusts, and will not invest more than 10% of its gross assets in companies that themselves may invest more than 15% of their gross assets in listed closed-ended investment funds. d) Principal activity The principal activity of the Company is to pursue its objective by operating as an investment trust company. The investment trust company structure allows the shareholders, whether institutions or private investors, to access a diversified portfolio of investments that is professionally managed. The principal activity remained unchanged throughout the year ended 31 May e) Strategy The Company has appointed Henderson Global Investors Limited ( Henderson ) to manage the investments and to provide the related administrative services. Henderson provides a specialist fund manager whose role is to pursue the Company s objective within parameters determined by the Board. These parameters reflect investment policy and the Board s assessment of the risks facing the Company, including the importance of retaining the Company s taxation status as an investment trust. As an investment company the Company invests its shareholders funds in the securities of other companies. In addition it has the ability to borrow money (termed gearing ) in order to increase the funds available for investment. It does this by means of both fixed borrowings (its 20 million issue of 10.5% Debenture Stock, repayable in 2016) and short term borrowings (drawn down from facilities provided by National Australia Bank with a current capacity of 20 million). In the event that the investment outlook becomes unfavourable, the Company may reduce its gearing to nil. However, it would expect the shareholders funds to remain invested in all but unusual circumstances. f) Performance measurement and key performance indicators In order to measure the success of the Company in meeting its objectives and to evaluate the performance of the Manager, the directors take into account the following key performance indicators: Performance measured against the benchmark The Board reviews, at each of its meetings, the performance of the portfolio, the net asset value per share ( NAV ) and the share price and compares them with the performance of the Company s benchmark. Discount to the net asset value per share The Board monitors the level of the discount to the NAV at which the Company s shares trade and reviews the average discount for the Company s relevant AIC (Association of Investment Companies) sector (the UK Smaller Companies sector). The Board considers whether to use share buy-backs to enhance shareholder value. Shares are only bought back at a price below the prevailing NAV, thereby increasing the NAV for the remaining shareholders. The Company publishes a NAV figure on a daily basis, through the official newswire of the London Stock Exchange. This figure is calculated in accordance with the AIC formula (and since 1 June 2008 includes current financial year revenue items). Performance measured against the Company s peer group The Company is included in the AIC s UK Smaller Companies sector, which represents the Company s peer group. In addition to comparison against the benchmark, the Board also considers the performance against the peer group. Ongoing charges Ongoing charges are those expenses of a type which are likely to recur in the foreseeable future, whether charged to capital or revenue, and which relate to the operation of the investment company as a collective fund, excluding the costs of acquisition or disposal of investments, financing charges and gains or losses arising on investments. Ongoing charges are based on actual costs incurred in the year as being the best estimate of future costs. The Board reviews the ongoing charges and monitors the expenses incurred by the Company. The Company previously applied a Total Expense Ratio; under recommendation of the AIC the terminology and methodology has been changed to ensure consistency of approach and calculation across the investment company sector and UCITS funds. g) Principal risks and uncertainties The principal risks and uncertainties facing the Company relate to the activity of investing in the shares of smaller companies that are listed (or quoted) in the United Kingdom. Although the Company invests almost entirely in securities that are quoted on recognised markets, share prices may move rapidly

17 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements Directors Report and it may not be possible to realise an investment at the Manager s assessment of its value. The companies in which investments are made may operate unsuccessfully, or fail entirely, such that shareholder value is lost. The Company is also exposed to the operational risk that one or more of its suppliers may not provide the required level of service. The Board considers regularly the principal risks facing the Company in order to mitigate them as far as practicable. A fuller description of the principal risks and uncertainties follows. With the assistance of the Manager, the Board has drawn up a risk matrix which identifies the key risks to the Company. These key risks fall broadly under the following categories: Investment activity and strategy An inappropriate investment strategy (for example, in terms of asset allocation or the level of gearing) may lead to underperformance against the Company s benchmark and the companies in its peer group; it may also result in the Company s shares trading at a wider discount to the net asset value per share. The Board manages these risks by ensuring a diversification of investments and a regular review of the extent of borrowings. The Manager operates in accordance with investment limits and restrictions determined by the Board; these include limits on the extent to which borrowings may be used. The Board reviews its investment limits and restrictions regularly and the Manager confirms its compliance with them each month. The Manager provides the directors with management information, including performance data and reports and shareholder analysis. The Board monitors the implementation and results of the investment process with the Fund Manager, who attends all Board meetings, and reviews regularly data that monitors risk factors in respect of the portfolio. The Board reviews investment strategy at each Board meeting. Accounting, legal and regulatory In order to qualify as an investment trust the Company must comply with section 1158 of the Corporation Tax Act 2010, to which reference is made on page 13 under the heading Status. A breach of section 1158 could result in the Company losing investment trust status and, as a consequence, capital gains realised within the Company s portfolio would be subject to Corporation Tax. The section 1158 criteria are monitored by the Manager and the results are reported to the directors at each Board meeting. The Company must comply with the provisions of the Companies Act 2006 ( the Companies Act ), and, as the Company s shares are listed for trading on the London Stock Exchange, the Company must comply with the UK Listing Authority s Listing Rules and Disclosure and Transparency Rules and the Prospectus Rules ( UKLA Rules ). A breach of the Companies Act could result in the Company and/or the directors being fined or becoming the subject of criminal proceedings. Breach of the UKLA Rules could result in the suspension of the Company s shares which would in turn lead to a breach of section The Board relies on its Company Secretary and its professional advisers to ensure compliance with the Companies Act and UKLA Rules. Corporate governance and shareholder relations Details of the Company s compliance with corporate governance best practice, including information on relations with shareholders, are set out in the Corporate Governance Statement on pages 18 to 24. Operational Disruption to, or failure of, the Manager s accounting, dealing or payment systems or the Custodian s records could prevent the accurate reporting and monitoring of the Company s financial position. The Manager has contracted some of its operational functions, principally those relating to trade processing, investment administration and accounting, to BNP Paribas Securities Services. Details of how the Board monitors the services provided by the Manager and its other suppliers, and the key elements designed to provide effective internal control, are explained further in the internal control section of the Corporate Governance Statement on page 23. Financial instruments and the management of risk By its nature as an investment trust, the Company is exposed in varying degrees to market risk (comprising market price risk, currency risk and interest rate risk), liquidity risk and credit and counterparty risk. An analysis of these financial risks and the Company s policies for managing them are set out in note 16 on pages 48 to 52. h) Financial review Capital At 31 May 2013 the Company had in issue 74,701,796 ordinary shares of 25p each. The market price per share at that date was 454.0p, giving the Company a market

18 16 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements 2013 Directors Report capitalisation of million. Total equity equalled million, the NAV being 540.0p per share. Accordingly, the market price per share stood at a discount of 15.9% to the NAV. The Company seeks annual shareholder authority to buy back its shares in the market for cancellation. During the year the Company bought back 40,000 of its ordinary shares (2012: 165,000) this represented 0.05% of the called up share capital. The aggregate consideration paid for the shares repurchased was 120,000. Since the year end no further shares have been purchased. Performance The Company had a strong year in terms of performance, rising substantially in absolute terms. The stock market rose over the year and, because of good stock selection, and the positive effects of gearing, the Company outperformed its benchmark on a total return basis. On a total return basis the benchmark index increased by 39.3% over the year ended 31 May 2013 (2012: fell by 7.7%). By comparison the Company s net asset value total return was 46.1% (2012: fell by 5.2%). Performance attribution Year ended 31 May 2013 Net asset value per share total return 46.1 Benchmark total return 39.3 Relative performance 6.8 Made up: Stock selection 5.5 Gearing 2.4 Share buy backs 0.0 Expenses Notes: 1. The benchmark is the Numis Smaller Companies Index (excluding investment companies). 2. Source: Henderson Global Investors Limited. The table sets out the Manager s understanding of the movement, relative to the benchmark, between the net asset value per share at 31 May 2012 (374.5p) and the net asset value per share at 31 May 2013 (540.0p). Assets The Company s net assets increased during the year from 280 million to 403 million. The net asset value per ordinary share increased during the year from 374.5p to 540.0p. The Company has no employees and no premises or physical assets of its own. Costs The Company s most significant items of expenditure are the costs of borrowing money for investment (the costs of gearing) and the management and, if applicable, performance fees payable to the Manager. Other expenses include investment transaction costs, the directors fees and insurance, the fees of professional advisers and regulators, marketing, and the production and issue of reports to shareholders. In the year under review borrowing costs totalled 2,235,000, the management fee was 1,206,000 and other expenses totalled 489,000. These figures include VAT where applicable. A performance fee of 2.0 million is payable in respect of the year ended 31 May The transaction costs, which include stamp duty and totalled 435,000, are included within the purchase costs or netted against the sales proceeds of investments. The ongoing charge is a measure of the Company s running costs as defined on page 14. For the year ended 31 May 2013, the ongoing charge is 0.50% (2012: 0.50% no performance fee was payable) and 1.07% including the performance fee. Revenue and dividend The Company s investment income and other revenue totalled 8,605,000 (2012: 8,231,000). After deducting expenses the revenue profit for the year was 4,661,000 (2012: 4,538,000). The Board seeks to increase each year the dividend per ordinary share that it puts to the shareholders for approval. The amount available for distribution represents the investment income of the Company less all borrowing costs, taxation, management fees and administrative expenses (except the performance fee). The difference between the totals of income and expenditure may vary from year to year because the Company s most significant costs are not necessarily related closely to the investment income. Accordingly, it is not possible to be certain that a progressive dividend policy can be maintained. In respect of the year under review the directors recommend a final dividend of 6.5p per ordinary share (2012: 5.50p). Subject to approval at the Annual General Meeting, the final dividend will be paid on 11 October 2013 to shareholders on the register of members on 20 September Donations During the year the Company made charitable donations totalling 5,000 (2012: 5,000). No political donations were made (2012: nil).

19 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements Directors Report The Board supports a number of charities, all of which are personally selected on an annual basis by the directors. These charities span a variety of different causes including further education, working with under privileged and deprived children and young people, motor neurone disease and the rehabilitation of prisoners. Payment of creditors It remains the Company s policy for the forthcoming financial year to obtain the best terms for all business and therefore there is no single policy as to the terms used. In general the Company agrees with its suppliers the terms on which business will take place and it is the Company s policy to abide by such terms. There were no trade creditors at 31 May 2013 (2012: none). i) Going concern The Company s shareholders are asked every three years to vote on the continuation of the Company. The next continuation vote will be put to shareholders at the forthcoming AGM in October The assets of the Company consist almost entirely of securities that are listed (or quoted on AIM) and, accordingly, the directors believe that the Company has adequate financial resources to continue in operational existence for the foreseeable future. For these reasons, the Board has decided that it is appropriate for the financial statements to be prepared on a going concern basis. In reviewing the position as at the date of this report, the Board has considered the guidance on this matter issued by the Financial Reporting Council. j) Future developments The future success of the Company is dependent primarily on the performance of its investments, which will to a significant degree reflect the performance of the stock market and the Manager. Although the Company invests in companies that are listed or quoted in the United Kingdom, the underlying businesses of those companies are affected by various economic factors, many of an international nature. The Board s intention is that the Company will continue to pursue its investment objective in accordance with its investment policy. Further comment on the outlook for the Company is given in the Chairman s Statement and in the Fund Manager s Review. k) Life of the Company The Board announced on 27 September 2002 that it proposed to introduce regular continuation votes for the Company. Accordingly, a continuation vote was put to the Annual General Meeting of the Company in September 2004, 2007 and A similar resolution will be put to the Annual General Meeting in October 2013 and the Board has no reason to believe that this resolution will not be passed. Accordingly, at every subsequent third Annual General Meeting thereafter, an ordinary resolution will be put asking the shareholders to approve the continuation of the Company as an investment trust. In the event of the shareholders in general meeting voting against the continuation of the Company, the directors would expect to convene a further general meeting, as soon as practicable, at which proposals to liquidate, reorganise or reconstruct the Company would be put forward. Directors a) The directors The directors of the Company, as shown on page 12, are Mr J M B Cayzer-Colvin, Mr J J Nelson, Mr K E Percy, Ms M A Sieghart, Mrs B Hollond and Mr D Lamb. All served throughout the year under review, with the exception of Mr D Lamb who was appointed on 1 August The Board may appoint directors to the Board without shareholder approval. Any director so appointed must stand for reappointment by the shareholders at the next Annual General Meeting in accordance with the Articles of Association. The total number of directors shall not be less than two nor more than fifteen. In addition, under the Articles of Association, shareholders may remove a director before the end of his or her term by passing a special resolution at a general meeting of the Company. A special resolution is passed if more than 75% of the votes cast, in person or by proxy, are in favour of the resolution. In accordance with the Company s Articles of Association, Mrs B Hollond will retire by rotation at the forthcoming Annual General Meeting and, being eligible, offers herself for re-election. The Board considers that Mrs Hollond should be re-elected because she brings wide, current and relevant business experience that allows her to contribute effectively to the leadership of the Company. Mr J J Nelson will retire and will not be seeking re-election at the forthcoming AGM after 11 years on the Board. The Board would like to thank Mr Nelson for his contribution to the Company during this time. Mr D Lamb was appointed as a Non-Executive Director of the Company on 1 August He will therefore stand for election as a Director at the forthcoming AGM.

20 18 The Henderson Smaller Companies Investment Trust plc Report and Financial Statements 2013 Directors Report No director has, or during the financial year had, a contract of service with the Company. No director is or was materially interested in any contract subsisting during or at the end of the year that was significant in relation to the Company s business. The directors have reviewed their independence in the context of the UK Code of Corporate Governance and by reference to the AIC s Code of Corporate Governance. The directors have had no material connections with Henderson at all, other than as directors of the Company. The Board is of the opinion that each of the directors is independent in character and judgement and that there are no relationships or circumstances that are likely to affect their judgement. b) Directors interests The interests of the directors, at the end and beginning of the financial year, in the ordinary shares of 25p in the Company were as shown below: 31 May 1 June With beneficial interest: J M B Cayzer-Colvin 12,000 12,000 J J Nelson 45,000 45,000 K E Percy 5,980 5,700 M A Sieghart 2,546 2,259 B Hollond 5,700 4,550 No director had an interest in the Preference or Debenture Stocks of the Company. There were no changes in the directors interests between the year end and the date of this report. c) Directors fees A report on the directors remuneration is set out on pages 26 and 27. d) Directors conflicts of interest The Company s articles of association permit the Board to consider and, if it sees fit, to authorise situations where a Director has an interest that conflicts, or may possibly conflict, with the interests of the Company ( situational conflicts ). The Board has a formal system in place for Directors to declare situational conflicts to be considered for authorisation by those Directors who have no interest in the matter being considered. In deciding whether to authorise a situational conflict, the non-conflicted Directors must act honestly and in good faith with a view to the best interests of the Company and they may impose limits or conditions when giving the authorisation, or subsequently, if they think this is appropriate. Any situational conflicts considered, and any authorisations given, are recorded in the relevant meetings minutes. The prescribed procedures have been followed in deciding whether, and on what terms, to authorise situational conflicts and the Board believes that the systems it has in place for reporting and considering situational conflicts continues to operate effectively. e) Directors insurance and indemnity Directors and officers liability insurance cover is in place in respect of the directors. The Company s Articles of Association provide, subject to the provisions of UK legislation, an indemnity out of the assets of the Company for every director or other officer of the Company against any liability which he or she may incur as a director or other officer of the Company in defending any proceedings (whether civil or criminal) in which judgement is given in his or her favour, or he or she is acquitted, or in connection with any application under the Companies Act 2006 in which he or she is granted relief by the court. Corporate Governance Statement a) Background The UK Listing Authority requires all listed companies to disclose how they have applied the principles and complied with the provisions of the UK Corporate Governance Code ( the Code ). (The Code is accessible at and was published in May 2010 for accounting periods commencing on or after 29 June 2010 and updated in September 2012). Throughout the year under review the Code was in force. In addition, the AIC Code of Corporate Governance, issued by the Association of Investment Companies in October 2010 ( the AIC Code ), applies to the Company. (The AIC Code, and the related Corporate Governance Guide for Investment Companies, are accessible at b) Statement of compliance The directors consider that the Company has complied during the year ended 31 May 2013 with all the relevant provisions set out in the Code and with the AIC Code. c) Application of the Principles of the Code The Company is committed to high standards of corporate governance and the Board attaches importance to the matters set out in the Code and applies its principles. However, as an investment trust company, most of the Company s day to day responsibilities are delegated to third parties and the directors are all non-executive. Thus not all of the provisions of the Code are directly applicable to the Company.